Building up to an IPO – Critical considerations at the planning stage
It took me 17 years of hard work, discipline and determination to become an overnight success - Lionel Messi
This analogy holds good for any company that has seen a successful Initial Public Offering (IPO). While the IPO itself lasts for a short span, preparation for it needs to be rigorous, and requires sufficient time to put in place various aspects that would enable the company to hit the ground running post listing.
The Indian capital market has seen tremendous interest over the last decade. A proactive regulatory environment, sustained growth, and positive investor sentiment have helped this cause. More than 700 IPOs were made during this period, raising over $38 billion.
In the last five years alone, the IPO market has grown at a compounded annual growth rate of 194 percent! India also ranks second in the number of IPOs this calendar year, just behind Hong Kong.
Some recent IPOs, such as that of Chalet Hotels were inter alia undertaken to raise funds for debt repayment, while companies such as Ircon International were listed to meet the Government’s divestment targets. Further, the likes of HDFC Asset Management were listed to provide an exit to promoters.
While the timing of an IPO may be beyond a company’s control, proper planning ensures it can reap the benefits of the IPO when the time is right. In the process of coming out with an IPO, a company undergoes a significant transformation. Higher compliances, and intense scrutiny from the media, analysts, investors and regulators become a reality. If not planned carefully, it could be a recipe for failure.
Planning must revolve around the following key aspects:
- Business strategy and positioning
- Financial control and reporting capabilities
- Transparent and efficient group structure
- Corporate governance, corporate responsibilities and composition of the board of directors and committees
- Stake dilution by promoters and valuation expectation
A company must ensure it has a compelling narrative backed by a solid plan (both financial and business) and is able to monetise it through proper positioning and timing. Therefore, the company’s management has to consider the following questions:
- Does going for an IPO fit in the overall plans?
- What is the group’s USP?
- How is the group’s track record? What are its growth drivers for the future? How can these be evidenced?
- Does the company have a robust business plan?
- Who are the competitors, their relative size and position in the industry?
Financial control and reporting capabilities
Disclosure forms an integral part of building up to and IPO and even post a listing. Once listed, the company has to hit the ground running in terms of the various regulatory and other reporting compliance. Therefore, although it is required only post listing, it is imperative that the capabilities be factored in this phase itself. Accordingly, the group has to ensure:
- Financial hygiene
- Building/ enhancing reporting and disclosure capabilities
- Requirement of restatements of financial statements previously issued
- Quality and frequency of information provided to the board
- Compliance with the eligibility criteria for listing
- Impact assessment of migration to IND-AS
In this context, it is relevant to note that the transition to IND-AS could have a significant impact on the reported numbers. For instance, almost half the companies reported a fall in net income for the financial year 2016.
Transparent and efficient group structure
Group structure plays an important role in the way promoters and other stakeholders are remunerated and are compliant with applicable laws. Aspects requiring consideration include:
- Identification of the legal entity to be floated.
- Cross-holdings (if any) that need to be cleaned up.
- Undertaking restructuring to help in building robust financial.
- Location of the holding company of the group.
- Is a legal entity/ structure related re-organisation necessary?
- Can tax planning drive additional IPO value?
Corporate governance, corporate responsibilities and composition of the board of directors and committees
Post listing, a company would require a wide range of committees, such as audit committee, remuneration committee, etc. Further, a listed entity is also required to have independent directors and women directors on its board. A company has to ensure compliance with these provisions. Accordingly, the following questions have to be considered:
- Are you acting/ ready to act as a listed company?
- Composition of board of directors and their capabilities and experience?
- What kind of training needed for the board?
- What board committees are in place: audit, remuneration, nomination?
- What are the additional capabilities needed to meet the requirements of listing?
Stake dilution by promoters and valuation expectation
As a part of the IPO, the promoters will have to dilute stake in the company. Accordingly, the valuation expectation becomes relevant. Further, lock-in requirement, minimum subscription requirement from the promoters, etc., also needs to be factored. The key criteria in this regard are:
- Valuation expectations
- Pre-existing restrictions on transfers
- Expectation on timing of the IPO
- Which market would help the group fetch the desired valuation?
- Ability to comply with lock-in and minimum post issue subscription requirements
Role of an external advisor
The existing capabilities can be stretched during the process of launching an IPO and it becomes essential to leverage the experience and expertise of external stakeholders.
Given the complexities in the transformation, it is critical to prioritise and sequence the steps, or else the enormity of the task could weigh the organisation down.
To put it in perspective, imagine if the company looks at undertaking group restructuring, changing the reporting accounting standards, upgrading ERP, building additional compliance reporting capabilities, upgrading existing policies to comply with listing requirements, invest in cultural integration, etc., all at once! The chances of success are higher if these are done in a phased manner.
Readiness assessment helps a company review critical areas for a successful offering. It also helps the company to assess the “As is,” prioritise and sequence the events to get it ready for an IPO.
An independent external advisor could:
- Undertake the initial assessment
- Evaluate and prioritise the efforts required for the IPO
- Identifying additional resource requirements
- Bring requisite sector expertise
- Facilitate in assessing the external market climate, which would help in deciding the timing of the IPO
- Assist in developing a strategy for group restructuring that maybe required
- Develop policies (cyber security, remuneration, corporate governance, etc.) wherever required
The role of an external consultant, although not mandatory is usually preferred, as it provides substantial value, which the company can leverage.
The decision to go for an IPO can be a rewarding one, enabling a company to metamorphose from the cocoon of a closely-held company into a butterfly called a listed company. It ought to be regarded as a transformation process and not treated as a mere fund-raising event. Accordingly, solid business, good governance, adequate planning, well sequenced steps and diligent execution would help a company hit the ground running, and also facilitate in delivering greater value to all stakeholders in the long run.
This article includes inputs from Mahadevan R - Manager, M&A Tax, PwC India.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)